Which one factor most influences the price of gold?

As you have no doubt noticed, the price of gold goes up and down day by day, hour by hour and minute by minute.

What influences the price of gold? Several factors, including the time of year, investor and trader confidence, inflation, fluctuations in the U.S. dollar and U.S. stocks, international political and military tensions, and increases or decreases in the prices of other commodities.If we could only make sense of these price changes, we might have a better idea of where the price is going in the medium to long term.

But above all else, the price of gold is influenced by the U.S. dollar.

While the dollar is no longer backed by gold, gold is bought and sold in dollars. The U.S. dollar is also the world’s reserve currency. Most international trade is conducted in dollars.

This means that international corporations, and nation states, watch the dollar very closely indeed.

So while other factors are always in play, the power behind the scenes can usually be traced to confidence in the U.S. dollar, or lack thereof.

This factor is particularly relevance today, because the economic meltdown since 2008 has caused everyone to reconsider the long-term strength and stability of the dollar.

And when confidence in the future of the dollar takes a hit, everyone steps back and buys some more gold. Why? Because when the dollar falls, the price of gold goes up. And because gold is a store of real value, unlike a dollar bill which is simply a piece of paper with the “promise” of value. The paper itself is almost worthless.

If you want some insight into future prices of gold, take a look at what the really big players are doing. And by big players, I mean countries like China, and investors like John Paulson. Paulson & Co already holds $3 billion in gold-related investments, and Paulson has just seeded a new gold-related fund with some $250m of his own funds.

These players are buying gold at an unprecedented rate. They are choosing to store their wealth in gold, and not just the U.S. dollar. To put this into perspective, Chinese officials recently stated that they had been buying gold since 2003 and now own some thirty times more gold than they did in 1990.

For individuals, even with more modest gold holdings, it always makes sense to pay attention to what’s happening with the U.S. dollar.

Like large countries, we should at the very least be hedging our bets and securing a proportion of our wealth by buying gold.

And if you believe the U.S. dollar is facing a long-term period of decline, you should be buying a lot more gold.